UK pension funds could be in line to receive billions of pounds in compensation from five banking giants, as a former chairman of the Pensions Regulator takes them to court in one of the first US-style class actions in the UK.
Michael O’Higgins, currently chairman of the Local Pensions Partnership, is bringing a collective action against Barclays, Citigroup, JPMorgan, UBS and RBS for billions of pounds in compensation, alleging that they unlawfully manipulated the foreign exchange market between 2007 and 2013, breaking competition laws.
This claim follows the European Commission’s investigation into forex rigging, which concluded that the banks violated EU competition law. The five banks have been fined more than $8.5bn (£6.5bn) by regulators globally, the claimants stated.
The case is one of the first to be tried under the Consumer Rights Act 2015, which brings US-style class actions to the UK.
We are not talking about vast numbers of consumers with forex at the airport, but major organisations that have done transactions of very large amounts where half a basis point can translate into a very large sum of money
Michael O'Higgins, claimant
UK-domiciled entities are automatically included in the claim, while non-UK-domiciled entities need to opt in. “Everyone’s in, unless they opt out,” Mr O’Higgins tells Pensions Expert.
Case in early stages
Although, a pre-trial hearing took place on November 6 at the UK’s Competition Appeal Tribunal, the case is still in an early stage. Mr O’Higgins, who is being represented by law firm Scott & Scott UK, says that he has only talked to a couple of pension funds both in the UK and in the US about the action.
Most UK pension funds could stand to profit, Mr O’Higgins claims, as these schemes “routinely engage in foreign currency transactions if they are buying investments abroad”.
“Pension funds have been increasing their exposure to infrastructure and energy investments as yields from gilts and bonds have been so low, and infrastructure investment has not been confined to the UK. There will also be exposure by corporates acting on behalf of the company.”
Assessing compensation
If the claim is successful, the compensation figures will depend on the calculations used, Mr O’Higgins explains.
“What fraction of a basis point was the exchange rate corrupted by? The bigger that fraction, the bigger the amount. Our modelling gives us numbers that go from a little under £1bn if you take very conservative assumptions to quite a number of billions if you take quite generous assumptions,” he says.
“We are fairly confident that it will be more than £1bn and could be several billion, depending on that margin of corrupt behaviour and the proportion of non-UK-domiciled clients we get to join the action.”
Therium Capital Management, a global litigation funder, is funding the case, with very high litigation expenses expected. After-events insurance to cover £27m costs in case of a loss has been taken.
Mr O’Higgins says: “Therium would not have agreed to fund us unless they were relatively confident about our chances. The case has been tried in the US and a number of the banks have been found guilty.”
He noted that it would be helpful if UK pension funds could review their forex transactions during the relevant time period and share that data with the claimants.
On the other hand, schemes are not required to do any work at this stage, since under the new legal system pension funds do not have to produce documentation unless there is an amount to distribute, he adds.
Case to be heard in 2021
The law was changed in 2015 under the Consumer Rights Act, with a number of cases working their way through the system.
Mr O’Higgins says: “We are the sixth, one of the bigger ones. The implementation of the law has not been tested. It is a very good example of the right case.
Could a Brexit swing in sterling catch out UK schemes?
UK pension schemes continue to think globally with new allocations in the name of diversification, but are they managing their currency risk properly?
“We are not talking about vast numbers of consumers with forex at the airport, but major organisations that have done transactions of very large amounts where half a basis point can translate into a very large sum of money.”
However, the possible payouts, if the claim is successful, are not expected for at least three years.
Mr O’Higgins says: “At the point at which we have a compensation settlement to distribute, we will then be in touch with a lot of people. By then, we will have had details from the banks of the transactions that went through their books during the time period of the claim.”
The case is set to be heard in March 2021. Barclays, RBS, UBS, JPMorgan and Citigroup all declined to comment.
